Government contracts business capture and compliance folks, meet the human resources department. HR, please meet the govcon business development and compliance units. As long as you want to become or remain federal contractors or subcontractors, you are going to be spending lots of time working together from now on.

On August 25, 2016, the Federal Acquisition Regulatory Council (“FAR Council”) and the U.S. Department of Labor published a Final Rule (81 Fed. Reg. 58562) and Final Guidance (81 Fed. Reg. 58654) implementing Executive Order 13673, Fair Pay and Safe Workplaces. The 203 pages of Final Rules and Guidance, which become effective on October 25, 2016, fundamentally alter the way federal contractors and subcontractors will need to handle and resolve employment and labor claims and compliance issues involving their entire workforce. The Final Rules and Guidance could also result in otherwise-capable companies being “blacklisted” and effectively barred from federal contracts and subcontracts based on labor or employment law violations related or unrelated to prior or current federal contract performance.

The Final Rules and Final Guidance flesh out the mandates of Executive Order 13673, Fair Pay and Safe Workplaces (the “Order”) and are organized into three separate, but equally impactful, components: (1) Disclosure Requirements and Responsibility Determinations; (2) Paycheck Transparency; and (3) Arbitration of Title VII Claims and Tort Claims Related to Sexual Assault or Harassment.

Disclosure Requirements and Responsibility Determinations

The centerpiece of the new regulatory scheme is the new disclosure and responsibility determination requirement. 48 C.F.R. (or “FAR”) Part 22.20, and §§ 52.222-57, 52.222-58 and 52.222-59. Simply stated, contractors and subcontractors will need to disclose all “labor law decisions” they had during the three years as part of the process of applying for a new federal contract or subcontract. If a contractor or subcontractor has too many “labor law decisions” to report or the few it has are too severe, pervasive, repeated or willful in the eyes of newly minted government “experts,” the company could be deemed not “responsible” and denied a federal contract or subcontract. In other words, an OSHA citation, a Service Contract Act violation and/or an adverse single-plaintiff employment discrimination case could effectively bar your company from competing for a government contract or subcontract. That’s a lot to take in and oversimplifies 203 pages of regulations and guidance. Let’s break things down, in more detail.

“Responsibility” Matters

In the world of federal contracting, agencies are permitted to award contracts only to “responsible sources.” 10 U.S.C. § 2405(b); 41 U.S.C. § 3703. A “responsible source” means a prospective contractor that “has a satisfactory record of integrity and business ethics.” 41 U.S.C. § 113. The Federal Acquisition Regulations (FAR) mirror these statutory requirements. FAR 9.104-1.

Traditionally, a responsible source is a company that has not violated federal criminal laws involving fraud, conflict of interest, bribery, gratuities or the civil False Claims Act; has no federal tax issues; and otherwise appears to have business ethics and integrity. The Final Rule, however, expands the scope of responsible sources to also include compliance with a variety of generally applicable federal labor and employment laws, as well as the new Final Rule and Final Guidance. See FAR §§ 9.104-4, 9.104-5, and 9.104-6.

If a Contracting Officer deems a contractor not to be a responsible source, the federal government may pass on doing any business with such company. In other words, “responsibility” is a key threshold issue for any company desiring a federal contract or subcontract. Given the significance of “responsibility determinations” and the new emphasis placed on “labor law violations” in making such responsibility determinations, it is apparent why HR and govcon compliance functions are now inextricably linked.

Coverage

The “good news” is that the new disclosure requirements do not apply to everyone and also do not apply right away.

Coverage for the disclosure requirements will be phased in over the next year as follows:

October 25, 2016 - The Final Rule applies to prime contractors on all federal contract solicitations issued on or after October 25, 2016, and valued in excess of $50 million;

April 24, 2017 - The Final Rule applies to prime contractors on all federal contract solicitations issued on or after April 24, 2017, and valued in excess of $500,000.

The Final Rule does not apply to federal contracts valued at less than $500,000. There is also a phase-in period designed to allow the government to work out the kinks in its new regulatory scheme with the “big” contractors, in the hope that there may be relatively smooth sailing for all prime contractors by April 2017.

The Final Rule also applies only to solicitations for contracts and does not apply to federal grants or cooperative agreements. The potentially “bad news” is that there is no exception or exemption for prime contractors providing commercially available off-the-shelf (“COTS”) items.

The Compliance Process Begins

When bidding on a new federal contract and every six months after a contract award, covered contractors will be required, pursuant to FAR 52.222-57(c), to certify whether there has or has not been:

an administrative merits determination, arbitral award or decision, or civil judgment for any labor law violation(s) rendered against the Offeror during the period beginning on October 25, 2015, to the date of the offer, or for three years preceding the date of the offer, whichever period is shorter.

To emphasize the significance of this certification, the new regulations clarify that this certification “is a material representation of fact upon which reliance was placed when making award.” FAR 52.222-57(d)(iii). In other words, a knowingly false certification could serve as the basis for False Claims Act liability (e.g., triple damages, fines and/or criminal liability) for the contractor and/or grounds for the Contracting Officer to terminate the government contract, along with all of the other remedies to which the government may be entitled.

If a contractor has no “labor law violations” in the preceding three years, then simply check the “no” box. In this case, the company has no labor or employment information that could factor into a responsibility determination. Otherwise, check the “yes” box and be prepared to provide the Contracting Officer more detail and any mitigating circumstances in order to prove the company is responsible.

Given the high stakes involved in this one-sentence representation, the underlying definitions of “labor law” and “administrative merits determination, arbitral award or decision, or civil judgment” become vital.

The “Labor Laws”

According to FAR 52.222-59, the term “labor laws” includes the following federal statutes and Executive Orders:

Executive Order 13658 (Establishing a Minimum Wage for Contractors); and

Equivalent State laws.

Federal laws, regulations or Executive Orders not expressly mentioned above are not considered “labor laws” for purposes of the Final Rule and Guidance.

For now, the only Equivalent State laws recognized in either the Final Rule or Guidance are OSHA-approved state plans. The Department of Labor will likely add to the list of Equivalent State laws over time.

What Is a “Labor Law Decision”?

The FAR 52.222-57(c) certification/disclosure is centered around “labor law decisions” involving violations of the labor laws. What a labor law decision is requires some explanation.

1. Arbitral Award

The easiest to explain is an “arbitral award.” FAR 52.222-59(a) defines an arbitral award or decision as:

an arbitrator or arbitral panel determination that a labor law violation occurred, or that enjoined or restrained a violation of labor law. It includes an award or decision that is not final or is subject to being confirmed, modified, or vacated by a court, and includes an award or decision resulting from private or confidential proceedings

2. Civil Judgment

The next category of “labor law decision” is a “civil judgment.” This definition, however, can be counter-intuitive.

Civil judgment means any judgment or order entered by any Federal or State court in which the court determined that a labor law violation occurred, or enjoined or restrained a violation of labor law. It includes a judgment or order that is not final or is subject to appeal. To determine whether a particular judgment or order is covered by this definition, it is necessary to consult section II.B. in the DOL Guidance.

FAR 52.222-59(a). The Guidance explains that this term includes consent judgments, default judgment and preliminary injunctions. See 81 Fed. Reg. 58721. Private settlements, temporary restraining orders and accepted Fed. R. Civ. Pro. 68 offers of judgment are not considered “civil judgments.” Because this definition includes both final and non-final judgments, special attention should be given to which “civil judgments” fall within this definition and must be reported

3. Administrative Merits Determination

The most complicated category of “labor law decision” is the “administrative merits determination.”

Administrative merits determination means certain notices or findings of labor law violations issued by an enforcement agency following an investigation. An administrative merits determination may be final or be subject to appeal or further review. To determine whether a particular notice or finding is covered by this definition, it is necessary to consult section II.B. in the DOL Guidance.

FAR 52.222-59(a). The Guidance provides the following practical examples of “administrative merits determinations”:

from the Department’s Wage and Hour Division:

a WH-56 “Summary of Unpaid Wages” form;

a letter indicating that an investigation disclosed a violation of the FLSA or a violation of the FMLA, SCA, DBA or Executive Order 13658;

a WH-103 “Employment of Minors Contrary to The Fair Labor Standards Act” notice;

a letter, notice or other document assessing civil monetary penalties;

a letter that recites violations concerning the payment of subminimum wages to workers with disabilities under section 14(c) of the FLSA or revokes a certificate that authorized the payment of subminimum wages;

a WH-561 “Citation and Notification of Penalty” for violations under the OSHA Act’s field sanitation or temporary labor camp standards; and

an order of reference filed with an administrative law judge.

from the Department’s Occupational Safety and Health Administration or any state agency designated to administer an OSHA-approved state plan:

a citation;

an imminent danger notice;

a notice of failure to abate; or

any state equivalent;

from the Department’s Office of Federal Contract Compliance Programs:

a show cause notice for failure to comply with the requirements of Executive Order 11246, section 503 of the Rehabilitation Act, the Vietnam Era Veterans’ Readjustment Assistance Act of 1972 or the Vietnam Era Veterans’ Readjustment Assistance Act of 1974;

from the Equal Employment Opportunity Commission:

a letter of determination that reasonable cause exists to believe that an unlawful employment practice has occurred or is occurring;

from the National Labor Relations Board:

a complaint issued by any Regional Director;

a complaint filed by or on behalf of an enforcement agency with a federal or state court, an administrative law judge or other administrative judge alleging that the contractor or subcontractor violated any provision of the Labor Laws; or

any order or finding from any administrative law judge or other administrative judge, the Department’s Administrative Review Board, the Occupational Safety and Health Review Commission or state equivalent or the National Labor Relations Board that the contractor or subcontractor violated any provision of the Labor Laws.

81 Fed. Reg. 58720.

What constitutes an administrative merits determination can be relatively complicated and will require a great deal of attention to properly identify decisions that must be disclosed. On the upside, the Final Guidance clarifies that unless a “decision” squarely falls into one of the foregoing seven categories, it is not a reportable “administrative merits determination.”

The Applicable “Look Back” Period

Perhaps the only “good news” about the Final Rule and Guidance is that there is a finite “look back” period of no more than three years for labor law violations. As explained in FAR 52.222-57(c), the disclosures involve only administrative merits determinations, arbitral awards or civil judgments “during the period beginning on October 25, 2015 to the date of the offer, or for three years preceding the date of the offer, whichever period is shorter.”

Detailed Disclosures

If a contractor checks the “yes” box and certifies under FAR 52.222-57(c) that it had disclosable labor law violations during the prior three years, then it is up to the Contracting Officer to request additional information from the contractor when making the government responsibility determination. Upon the Contracting Officer’s request, the contractor shall provide the following detailed information:

the name of the court, arbitrator(s), agency, board or commission that rendered the determination or decision.

The contractor is required to upload this information into the System for Award Management (“SAM”) at www.sam.gov. All uploaded information will be publicly viewable and available. FAR 52.222-57(d)(1)(i).

Upon request, the contractor shall also provide the Contracting Officer with a copy of the actual administrative merits determinations, civil judgments and arbitral awards.

Finally, the contractor, at its discretion, may also upload to SAM such additional information as it deems “necessary to demonstrate its responsibility, including mitigating factors and remedial measures such as Offeror actions taken to address the violations, labor compliance agreements, and other steps taken to achieve compliance with labor laws. Offerors may provide explanatory text and upload documents.” FAR 52.222-57(d)(iii). Any exculpatory or mitigating information the contractor decides to upload will not be made public unless the contractor designates that information as “public.”

How the Government Will Use Disclosed Labor Law Violations to Make Required Responsibility Determinations

This is where things become more complicated and opaque. Federal Contracting Officers have no subject-matter expertise with federal labor and employment laws. So, the Final Rule and Guidance created a new position-Agency Labor Compliance Advisor, or ALCA-to assist the Contracting Officers in assessing a contractor’s history of labor law violations. The ALCA has no independent power. Instead, the ALCA can make only recommendations to the Contracting Officer. The ALCA must provide his or her recommendation to the Contracting Officer within an incredibly short three business days of when the contractor submits the detailed disclosure information.

An ALCA’s recommendation must be one of the following:

responsible;

responsible, but only if the contractor agrees to a labor compliance agreement or other remedial measures after contract award;

responsible, but only if the contractor agrees to a labor compliance agreement or other remedial measures before contract award;

responsible, but only if the contractor signs a labor compliance agreement before contract award; or

not responsible.

FAR 22.2004-2(b)(3). In making these recommendations, the ALCA is required to categorize each disclosed labor law violation-both individually and in combination with others-as being either serious, repeated, willful or pervasive. Much of the Final Guidance is dominated with discussions of how violations are to be categorized as “serious,” “repeated,” “willful” or “pervasive”-the details of which will not be discussed here. The more serious, repeated, willful or pervasive the labor law violations, the more likely a contractor will be deemed not responsible.

Among the factors the ALCA must weigh in favor of a responsibility recommendation are:

a low number of labor law violations relative to the size of the company;

the existence of safety and health programs, grievance procedures and compliance programs;

recent legal or regulatory changes;

contractor’s good faith beliefs and reasonable grounds for its legal positions; and

a history of compliance following a labor law violation.

The key takeaway here is that considerable discretion is given to the ALCA on how to classify each “labor law violation,” the sufficiency of remedial measures or labor compliance agreements and, ultimately, whether to find a particular contractor responsible. Because Contracting Officers have no experience with federal employment and labor law, Contracting Officers will likely adopt the responsibility recommendations of their ALCA.

Labor Compliance Agreements

The greatest current unknown in the Final Rule is exactly how “labor compliance agreements”-the centerpiece of mitigation efforts-will work. No sample or form “labor compliance agreements” are provided as part of the Final Rule or Final Guidance. It is reasonable to assume that they may be similar in content and scope to OFCCP conciliation agreements, OSHA settlement agreements or court-approved consent agreements. However, the duration, scope or enforcement mechanisms for any such “labor compliance agreements” are unknown. Without more information, it appears that such agreements could create long-term compliance complications for contractors and subcontractors that, in some circumstances, could outweigh the benefits of being eligible for a federal contract.

Subcontractors

Subcontractors are covered by the Final Rule and Guidance, starting on October 25, 2017, with subcontracts at any tier valued in excess of $500,000 (but not for COTS items). Generally speaking, subcontractors will have the same disclosure requirements. However, instead of disclosing their three-year history of “labor law violations” directly to the prime contractor or Contracting Officer, subcontractors will first make their disclosures directly to the Department of Labor. A special unit within the Department of Labor will perform the ALCA function for subcontractor disclosures and then provide the disclosing subcontractor with a written analysis of its “labor law violations.” The subcontractor then must provide the government’s analysis to the prime contractor (or higher-tier contractor) for the contractor to make a “responsibility” determination. See FAR 9.104-4; 52.222-59(c).

Like contractors, subcontractors are also required to update their labor law disclosures semiannually. Contractors and subcontractors at all levels will be required to “flow down” these disclosure requirements (FAR 52.222-58 and 52.222-59) in each of their subcontracts that exceed $500,000 for other than COTS items.

Future Wrinkles

The Final Rule and Guidance is not the end of the story. The Department of Labor has yet to issue or update its Guidance in several areas. Congress also has not yet weighed-in and already refused to fund the newly created ALCA positions in legislation passed over the summer. Separate House and Senate military spending bills are pending, which, if passed, could exempt military contractors and subcontractors from the disclosure requirements.

Practical Tips to Consider

Here are a few practical considerations concerning the disclosure requirements:

Gathering and sharing reportable information can be burdensome, particularly for larger employers with several divisions or locations. Internal operating and information aggregating procedures should be implemented so that the company’s government contracts compliance personnel have the required information at their fingertips for easy reporting. Meetings between company HR and government contracts compliance personnel should become a regular and frequent occurrence.

Because it is much easier to check the “no” box on the FAR 52.222-57 certification form, contractors and subcontractors have an added incentive to take steps to avoid or mitigate any employee complaints or government investigations that could blossom into a reportable “labor law decision.” Solid HR is no longer just a “cost center”-it is now a necessary condition precedent to being eligible for contract award.

A solid first step in mitigation efforts is to review current HR and payroll department policies and procedures. Companies should consider, with the advice of legal counsel, whether they should conduct internal labor and employment law compliance audits in an effort to proactively reduce the chances of government investigations and the issuance of “labor law decisions.”

When faced with litigation or arbitration involving the “labor laws,” companies should factor in the new Fair Pay and Safe Workplaces compliance risk as part of the overall litigation risk assessment, particularly if they already have one or two “labor law violations” in the preceding few years. Settling such cases before they become reportable may have outsized risk mitigation benefits.

When dealing with agency investigations involving “labor laws,” companies should consider getting legal counsel involved early in the process in an attempt to head off or reduce the scope of any “administrative merits determinations” to potentially reduce their ability to become “serious, repeated, pervasive, or willful.”

Because of the required public disclosures of “labor law violations,” it may be reasonable to assume that class action plaintiffs’ counsel and union organizers may review and use the public disclosures as a “tip sheet” for future legal claims against contractors under the theory “where there is smoke, there is fire.” Therefore, companies engaged in federal contracting and with disclosed “labor law violations” should review and adjust their labor/employment litigation budgets to handle a potential influx in claims.

Paycheck Transparency

The second major section of the Final Rule and Guidance concerns “Paycheck Transparency.” See FAR 22.2005, 52.222-60. The new Paycheck Transparency provisions:

become effective on January 1, 2017;

apply to contractors and subcontractors covered by the Fair Labor Standards Act, the Service Contract Act or the Davis-Bacon Act;

apply to all federal contracts valued at more than $500,000;

apply to all subcontracts valued at more than $500,000 other than for COTS items; and

apply to all employees and independent contractors.

Covered contractors and subcontractors must provide each worker with a detailed written wage statement, along with each paycheck. The written wage statement must list:

total hours worked in the pay period;

the number of those hours that were overtime hours;

the rate of pay;

the gross pay; and

an itemized list of any additions made to or deductions made from pay.

See FAR 52.222-60(b)(1). If the workers are paid biweekly or semi-monthly (instead of weekly), then the hours worked and overtime hours worked must be listed as weekly amounts in the written wage statement. FAR 52.222-60(b)(2).

For covered workers who are FLSA exempt, the written wage statement need not include a record of hours worked as long as the contractor previously informed the workers in writing of their overtime exempt status. The written notice must be given either before the worker begins work on the federal contract or in the first wage statement under the contract. FAR 52.222-60(b)(3).

Contractors and subcontractors are in compliance with the new federal paycheck transparency provisions if they are already complying with various state payroll reporting laws, deemed “Substantially Similar Wage Payment States.” FAR 52.222-60(c). These “Substantially Similar Wage Payment States” currently include: Alaska, California, Connecticut, the District of Columbia, Hawaii, New York and Oregon. See the U.S. Department of Labor website for more details. The Department of Labor may add or subtract from this list in the future.

The Paycheck Transparency provision also applies to workers who are independent contractors. Contractors must provide each independent contractor worker-prior to working on each new federal contract-with a written notification of that worker’s independent contractor status. The notice must be a separate document from any independent contractor agreement between the worker and contractor. FAR 52.222-60(d)(1). The new regulations clarify that a contractor’s classification of a worker as an independent contractor or compliance with the notice requirements is not evidence that the worker is properly classified as an independent contractor. FAR 52.222-60(d)(2).

The wage statement, any notice of FLSA exempt status and the independent contractor notifications required by the Final Rule must be provided “in English and the language(s) with which the significant portion(s) of the workforce is fluent.” FAR 52.222-60(e)(1). Contractors may provide the notices electronically (e.g., email) if the contractor regularly provides documents to its workers by electronic means.

Finally, contractors and subcontractors are required to “flow down” the FAR 52.222-60 Paycheck Transparency contract clauses “in all subcontracts that exceed $500,000, at all tiers, for other than commercially available off-the-shelf items.” FAR 52.222-60(f).

These new Paycheck Transparency requirements appear to be a trap for the unwary. The information mandated here will likely be among the first data reviewed by a Department of Labor investigator or plaintiff’s counsel in any FLSA, SCA or DBA matter. Therefore, the information needs to be compliant with the Final Rules and Guidance and correct. This may be a good time to review payroll processes and forms with internal stakeholders and outside payroll services providers. The independent contractor written notice requirement directly feeds into the Department of Labor’s latest focus on the misclassification of employees. Extra prudence may be warranted before classifying any worker on a federal project as an “independent contractor.”

Arbitration of Title VII Claims and Tort Claims Related to Sexual Assault or Harassment

The last major section of the new regulations concerns “Arbitration of Contractor Employees Claims.” See FAR 22.2006, 52.222-61. The new arbitration provisions:

become effective October 25, 2016;

apply to all contracts and subcontracts valued at more than $1,000,000 (excluding COTS items); and

do not apply to employees covered by a collective bargaining agreement.

In the new FAR clause:

The Contractor hereby agrees that the decision to arbitrate claims arising under title VII of the Civil Rights Act of 1964, or any tort related to or arising out of sexual assault or harassment, shall only be made with the voluntary consent of employees or independent contractors after such disputes arise. FAR 52.222-61(a).

In other words, this contract provision could effectively void company-wide arbitration plans (at least as they relate to Title VII and sexual harassment claims and are not part of collective bargaining agreements) for workers on federal projects and puts the decision to arbitrate in the hands of the worker, but only after the worker has a claim.

In addition to a carve-out for collective bargaining agreements, there is an exemption for employees and independent contractors who entered into contracts to arbitrate before the contractor bid on a federal contract containing FAR 52.222-61. However, the exemption is lost if the contractor is permitted to change the terms of the arbitration contract or when the arbitration contract is renegotiated or replaced. Federal contractors are required to “flow down” FAR 52.222-61 to all subcontracts valued at more than $1 million and excluding COTS items. FAR 52.222-61(c).

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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